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Hungary central bank raises rates unexpectedly for fourth time in two weeks - Metro US

Hungary central bank raises rates unexpectedly for fourth time in two weeks

FILE PHOTO: A view of the entrance to the National Bank of Hungary building in Budapest

BUDAPEST (Reuters) – Hungary’s central bank unexpectedly raised interest rates for the fourth time in just two weeks on Tuesday amid a surge in inflation that has put increased pressure on the forint and its bond market.

The National Bank of Hungary was the first European Union central bank to start raising interest rates in June to combat growing price pressures amid a faster-than-expected recovery from the coronavirus pandemic.

Despite growing evidence of strong inflationary pressures, however, the bank slowed the pace of rate rises in September in what some analysts have called a mistake before ramping up the pace of tightening again at its regular meeting this month.

The NBH has raised its base rate by a combined 150 basis points since June, but economists said more aggressive rate hikes early this month by the Czech and the Polish central banks increasingly made the NBH look an outlier in the region.

On Tuesday, at a non-rate-setting meeting, the bank raised its collateralised loan rate by 105 basis points to 4.1% and the overnight deposit rate by 45 basis points to 1.6%, widening its interest rate corridor and creating room for itself to act.

“Widening and setting the interest rate corridor asymmetrically upwards is an integral part of the strategy of the new phase of monetary policy,” the bank said.

“In order to achieve and maintain price stability, it is highly important that the central bank has the appropriate monetary policy room for manoeuvre.”

The forint, which sank to a new record low at 372 per euro last week, immediately firmed after the announcement, reaching 366.1 versus the euro by 1403 GMT from 367.14 per euro.

Peter Virovacz, an economist at ING, said the move could help shore up the forint to around 360 by the end of the year, adding however, that the bank’s tightening measures take effect with a substantial lag due to a complicated policy toolkit.

“It is like a freight train. The engine is jam packed with coal but it takes some time before it ignites and gets the train rolling,” he said.

Tuesday’s move comes just two weeks after the bank hiked interest rates by 30 basis points across the board and said it would lift its one-week deposit rate above the base rate in response to short-term market risks.

The bank followed up that pledge with two hikes in the one-week deposit rate worth a combined 110 basis points over the past two weeks, raising it to 2.9%.

Last week’s hike, however, brought the one-week rate within a whisker of the top of the interest rate corridor, forcing the bank to act by raising the top of the corridor. The next one-week deposit tender is due on Thursday.

(Reporting by Gergely Szakacs and Krisztina Than; Editing by Peter Graff and Alison Williams)

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